Strange Split in Bellwether Trade Data Out of Taiwan

Taiwan’s exports have long been considered a bellwether of global demand due to the island’s prominence in the electronics supply chain. But the recent divergence in export-related indicators has left some investors puzzled.

Container ships sit docked in Taiwan, which is hoping its exports started to grow again in November.

Bloomberg News

Export orders, a harbinger of actual exports a month or two down the line, have been rising modestly since July, in a range of 0.5%-3.2%. That trend is in sync with purchasing managers indexes that have shown manufacturing growing for four straight months and which rose in November at their fastest pace since March 2012.

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Actual exports, however, have been in negative territory after falling 1.5% on-year in October and 7.0% in September. That could change in November: Though the country’s finance minister said last week that exports likely fell for a third straight month in November, economists surveyed by The Wall Street Journal forecast a median gain of 2.3%. The data is due out later Monday.

The US$10 billion-US$15 billion gap between the value of actual exports and export orders could be explained in part by Taiwanese output produced abroad. Export orders, and to a certain extent the PMI, take into account overseas production, while actual exports only count domestic production.

According to Taiwan’s Ministry of Economic Affairs, about 52.9% of the island’s export orders in October were for goods produced and shipped outside Taiwan. That’s up from 47% five years ago.

That means the recent launch of new devices by these brands is buoying Taiwan’s export orders and PMIs, but not its exports.

Within Taiwan, the situation for manufacturing is becoming dire. TSMC’s advanced processors, which find their way into many electronic devices, are produced exclusively in Taiwan and are a major component of GDP, but that’s more the exception than the rule.

TV panels from Taiwan face stiff competition from China and South Korea, while branded smartphones — particularly those made by Taiwan’s HTC Corp. — have been losing market share to rivals for a couple of years.

Continued outflows of investment and talent from Taiwan will weigh on the island’s domestic production going forward, further weakening its competitiveness.

Foxconn and Quanta Computer moved to China in the 1990s to take advantage of lower production costs and vast pool of cheap workers. Within a decade these companies grew into the world’s biggest employers, in part due to incentives provided by the Chinese government, which counted on these firms to boost employment, urbanization and economic growth.

If these companies need to relocate some manufacturing as China’s labor costs rise, they’re more likely to build factories in Southeast Asia – targets include Laos, Cambodia and Indonesia — rather than come back to Taiwan. Foxconn, for example, has said it’s considering building a smartphone factory in Indonesia.

Taiwanese businesspeople complain that the government doesn’t provide enough incentives to lure businesses, citing a reluctance to open the door wider for low-cost foreign workers or offer more affordable land.

The fact that Taiwan finds it difficult to strike trade deals with other nations — due to pressure from China, which claims sovereignty over the island — also makes it less commercially viable for companies to move back, economists say.

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